Friday, February 17, 2012

Does Government Spending Bring Prosperity?

Many leaders in high places now promise us that our government
will never again permit poverty and depression to devastate our land.
They propose more government spending as a cure for every economic evil.
And millions of people believe that such a program will work.

The
underlying philosophy behind political spending is not new. Similar
ideas have appeared throughout all history. They came to full flower
shortly after the economic collapse of 1929, when unbalanced budgets
were generally accepted as necessary economic measures for relieving
those in distress. You could not let innocent people starve, could you?

People
pointed to idle factories, unemployed workers and their unsatisfied
wants. All we need to do, they said, is to get the government to start
priming the pump. A little government spending would provide the
would-be workers with the wherewithal to buy the things they desperately
need. This would encourage businessmen to put the unemployed to work in
the idle factories. This solution sounded so simple, and its political
appeal was apparent. So we tried it.

People
just plumb forgot all that economists had ever taught. Many desperate
persons reached for whatever share they could get of the apparent
prosperity that followed. Until war changed the picture, the price they
paid was chronic unemployment by the millions. Are we now asking for a
repeat performance?

Most
people seem to forget that the government can pay out only what it
borrows or collects in taxes. They also forget one of the most
elementary facts of a free economy —men who will not accept going wage
rates must remain unemployed. Likewise, they fail to understand the real
causes of depressions. A logical examination of pertinent data would
show them that it was Federal Reserve money manipulation that brought on
the depression we all deplore. We Americans truly need to know some
very simple economic facts.

No
free man works, buys or sells unless he fully believes that such action
will bring him greater satisfaction than he could enjoy if he did not
take that action. This means that in a free economy no man ever takes a
job at any wage unless he believes he is better off working at that wage
than he would be if he did not take it. Likewise, no employer ever
employs a man at any wage unless the employer feels that he will better
his situation by employing that man at that wage. So, in a free economy,
employees and employers believe that they have the best available
terms. When they feel otherwise, they shift jobs or employees.

In
the same vein, no woman ever buys a dress unless she believes that
dress will bring her more satisfaction than any other use she could make
of the same amount of money. On the other side of the transaction, no
storekeeper ever sells a dress unless he places a higher value on the
money he receives than he does on the dress he sells. As a result of the
sale, both buyer and seller are happier.

Thus,
in a free economy, every freely made transaction benefits all
participants. Consequently, any interference with freely made
transactions must result in a decrease in the satisfaction and happiness
of all persons concerned. An economy that is free from restricting
regulations thus permits its people to enjoy the greatest happiness they
are capable of producing.

The Proper Sphere of Government

However,
in order to enjoy the full pleasures of prosperity, it is necessary for
peaceful people to be protected from all robbers, thieves and
fraudulent schemers who seek something for nothing at the expense of
their fellow-men. For this protective purpose, men have instituted
governments. Governments, like all valuable assets, have a price. This
price is collected in some form of taxes. Reasonable taxes are a
legitimate expense for all protected persons, property and production.
Taxes are like insurance premiums. In fact, a good government might be
called a form of life, fraud and robbery insurance. It is as necessary
for modern society as accident insurance is for every car driver of
moderate means. Without it, the risk of living, owning property and
driving might well involve financial risks that only a few could afford.
Good governments permit people to pursue their pleasures and production
while protected from the rascals who would infringe on their rights by
force or fraud. Taxes paid for this protection are an investment which
permits men to pursue their personal satisfaction and prosperity as each
one sees fit.

When
governments spend money for other than protective purposes, they must
first get that additional money. They can only get such funds by one or
more of three different methods. They can amass such funds by collecting
more ordinary taxes, borrowing from private savers, or simply printing
the extra money they want to spend. Most modern governments use all
three methods. Can such government spending increase the transactions
and satisfactions of individuals and, thus, the happiness and prosperity
of the people as a whole?

Hidden Costs

A
most common economic error is the failure to see or realize the
complete price of what one buys. People are too apt to reach for
something they want now, without weighing the costs they cannot
visualize at the moment. Many fail to realize that more beer and
merriment today may well mean no bread or meat tomorrow.

So
it is with government spending. We see the results of government
spending all around us. Government services are sold at bargain rates
below cost. The bureaucrats are good steady customers, and the subsidy
receivers spend money more freely than those who earn it. But many do
not see the complete price. They do not see the schools, homes,
hospitals and factories that could have been erected if the same funds
had been left in private hands. They do not see that present bureaucrats
could be private citizens producing goods not now available, and that
such an increase in marketable goods would tend to reduce all prices and
thus increase the satisfactions and living standards of every buyer.
They do not see the taxes that creep into the prices of every loaf of
bread and pair of shoes, placing the prices of such necessities beyond
the reach of the most needy.

When
the government raises the money it spends by borrowing savings or
taxing its citizens, it merely transfers spending power from private
owners and to political spenders in power. This creates no new wealth.
It reduces the amount private citizens can spend while increasing the
amount government can spend. With less money in their pockets and bank
accounts, private individuals and corporations must reduce the amounts
they spend or invest. Assuming prices and wages remain the same, they
must buy fewer goods and employ fewer workers on private payrolls
producing what people want most.

Money
spent by governments cannot create any more jobs or produce any more
wealth than it can when spent by private persons. In fact, it creates
less, because both the tax collectors and tax spenders must be paid a
commission. Their labors add nothing to the wealth of society. The shift
of the money from private citizens to political spenders must result in
fewer productive jobs, and thus a smaller amount of goods and higher
prices than if the money had been left in private hands.

Pattern of Production Changed

Political
spending also changes the whole pattern of the nation’s productive
forces. If the government spends its money by giving out subsidies to
one privileged group, the productive facilities of the country are then
partially directed toward satisfying the desires of that group instead
of the desires of those who originally earned the money. Many workers
and investors must shift from producing goods and services for customers
who earn their money, to producing goods and services for those who
first receive the dollars distributed during the government’s spending
spree.

Then,
too, much government spending is not based on the economic principle of
getting the most for the least. This permits political spenders to
grant privileges to their friends. Such political plums provide more
satisfaction and prosperity for nonproducers at the expense of
producers. The net result must always be a reduction in the production
of wealth. Any such reduction in the quantity of goods and services
available in the market tends to raise all prices and thus reduce the
satisfactions and living standards of every buyer in that market. So
spending to help one group, laudable as it may seem, does not, and
cannot, create general prosperity.

Diversion to War

If
the government spending is for war or defense, then some of the
nation’s investors and workers must go to work producing munitions and
military supplies. All the savings and workers so engaged are withdrawn
from industries satisfying the private needs and wants of individual
consumers. The end result, of course, is a reduction in the satisfaction
of the needs and desires of all those who prefer consumer goods over
war goods. The nation may have full employment, but individuals must
certainly get along with fewer consumer goods. Such lower personal
satisfactions have never been considered greater prosperity.

The
only reason men and factories are ever unemployed is that they will not
produce what consumers want most at prices consumers can and will pay.
Both men and factories can always be employed, if they will accept
market wages and prices. When they consider these too low and rely on
government to pay higher than market wages and prices with funds
obtained from private citizens, the immediate result must always be
unemployment or lower wages for those formerly engaged in satisfying the
desires of those whose money the government now spends. Unless
supported in idleness, these workers will soon gravitate to those
industries or pursuits that benefit most from the increased government
spending. Their competition will bring wages down to market levels, and
then no workers will any longer benefit from the increased government
spending.

Any
switch of money from private owners to political spenders can only
result in a redirection of the nation’s productive forces and temporary
gains for those who first receive the government orders or subsidies. In
the end, a readjustment of the nation’s productive forces will become
necessary. During the interim, total human satisfactions will be reduced
and the general welfare will suffer.

Danger of Depression?

The
question now asked is whether a substantial reduction in present
government spending would create a depression. Under the present
restrictive labor and monetary laws, the painful readjustment might well
be long and severe. Under a free economy, with free market wages and
interest rates, the necessary readjustment could be quickly made and
soon everyone would be enjoying a much higher living standard.

If
the government reduces both taxes and spending, it will leave more
money in private hands. This money then can, and will, employ more
people at higher real wages to make more of what people want most. The
nation’s productive forces would be redirected toward satisfying the
wants of productive persons, rather than satisfying those who were the
recipients of government expenditures. In a free market economy, every
worker and investor tends to seek those outlets which will produce what
consumers want most, as indicated by the wages and prices consumers will
pay. So workers and investors now engaged in satisfying political
spending would soon find more profitable outlets satisfying the
increased spending of private producers. Everyone would soon have more.
That is not a depression. That is prosperity.

Results of Inflation

In
cases where the government prints the money, either directly or
indirectly, by first printing bonds and then issuing new money with only
its own bonds as security, the result is inflation. Inflation is a tax
on everyone who owns or is owed a dollar. Its effects are more hidden
than those of other taxes. Another important difference is that
inflation transfers economic wealth from one group of people to another
group, as well as from private citizens to their government. The
inflation tax is a boon to all who owe dollars and a burden on all who
are owed dollars. It changes the values of every contract that specifies
a future payment in dollars. It reduces the value of the money
involved. This is a temporary boon to the payer but, in effect, a tax on
the recipient.

Under
such inflationary conditions, wise businessmen become hesitant about
signing long-term contracts, so necessary for our present-day
complicated production system. Government inflationary spending thus
places an additional damper on prosperity, over and above all drawbacks
and redirection of productive forces brought about by government
spending of funds amassed by taxes or bond sales.

Those
who first receive the newly printed money are able to buy a part of the
nation’s production without having made any contribution. They must
profit at the expense of all those who have contributed to the total
production offered on the market place. Since the rewards of productive
contributors are less, some will retire or reduce their future
contributions to the market. Production will be further reduced by the
fact that some of the printed money recipients are supported in
nonproductive pursuits. Total production must, therefore, be lower. This
means there will be less for everyone who spends dollars in the market
place.

Taxes
which raise prices or curtail private spending cannot increase total
human satisfaction. Increased taxes reduce the voluntary transactions of
a free people and thus reduce their total satisfactions. Contrariwise,
any reduction in government spending and taxing will increase the
individual transactions of a free people and thus their individual
satisfactions and prosperity.